Spark Energy (SPKE) Raised to 'Buy' at Janney Montgomery Scott; Concerns 'Over-Exaggerated', Says Analyst

(Updated - July 28, 2016 11:13 AM EDT)

Janney Montgomery Scott earlier upgraded Spark Energy (NASDAQ: SPKE) from Neutral to Buy with a price target of $34. Analyst Michael Gyure sees recent concerns about a CFO change and M&A as "over-exaggerated," and he doesn't think positives are reflected in the stock.

"We believe SPKE has been trading down the past few weeks based upon investor uncertainty in three areas; the change in CFO in early June, concern of looming regulatory changes in certain states, and skepticism regarding the pending acquisitions. We believe concerns have been over-exaggerated in all three areas as we look toward the full 2Q16 results and update on the potential closing of the Major Energy and Provider Power acquisitions," said Gyure.

The analyst continued, "We believe any CFO change often results in more skepticism from everyone associated withthe financial statements. Related to SPKE, we believe the area of deferred customer acquisition costs is one of the more complex areas but we believe the current accounting is not unlike the accounting in other industries for similar items. On the regulatory front, we believe the NY appeals court ruling earlier this week regarding previously disclosed potential changes in marketing retail energy products is a positive for SPKE and the industry as a whole. We continue to expect the pending acquisitions will close and include $22 mm of adjusted EBITDA, net of $8 mm of customer acquisition costs, in our 2017E. Our estimate continues to be below SPKE initial guidance of approximately $30 mm as we continue to be conservative in what we believe are higher customer loss rates and higher expected customer acquisition costs."

Gyure concluded, "Our thesis is that SPKE is growing its portfolio of customer contracts both organically and through the effective integration of acquisitions. Back in February, sponsor National Gas and Electric announced it has entered into arrangements to acquire retail energy companies with over 500,000 residential customer equivalents (RCE's). The sponsor hopes to close multiple acquisition transactions in 2016 thus far covering 335,000 RCE's. We view these as a source of future potential drop-downs that SPKE could acquire. If all the RCE's at the sponsor level are acquired by SPKE, SPKE's portfolio of customers could potentially more than double in size. We have included an estimate for drop-down acquisitions in our current 2016E/2017E assuming the 2 previously announced transactions will close in 3Q16."

For an analyst ratings summary and ratings history on Spark Energy click here. For more ratings news on Spark Energy click here.

Shares of Spark Energy closed at $24.10 yesterday.

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